Elimination of misfolded proteins from the endoplasmic reticulum (ER) by ER-associated degradation (ERAD) involves substrate retrotranslocation from the ER lumen into the cytosol for degradation by the proteasome. For many substrates, retrotranslocation requires the action of ubiquitinating enzymes, which polyubiquitinate substrates emerging from the ER lumen, and of the p97-Ufd1-Npl4 ATPase complex, which dislocates polyubiquitinated substrates into the cytosol. Polypeptides extracted by p97 are eventually transferred to the proteasome for destruction. Eeyarestatin I (EerI) was recently identified as a potent inhibitor of retrotranslocation, but the mechanism of its action is unclear. Here we report that EerI blocks p97-associated deubiquitination (PAD) essential for the degradation of misfolded ER proteins. We further identify ataxin-3 (atx3), a p97-associated deubiquitinating enzyme previously implicated in ERAD, as one of the targets affected by EerI. In the absence of PAD, substrates carrying unprocessed polyubiquitin chains reach the proteasome, but remain bound by the proteasome without being degraded. Our analyses establish a role for a novel deubiquitinating process in proteasome dependent protein turnover. EerI, as the first deubiquitination inhibitor that acts on living cells, may offer novel therapeutics for certain types of human cancer. Indeed, we find that EerI can effectively induce apoptosis in both tumor cell lines and primary tumor cells isolated from patients.